New Wave of Fintech Firms Revive Investment and Public Interest In Online Lending

Fintech (FINancial TECHnology), the moniker for startups that aim to provide financial services by making use of modern technology, is big business. There are now close to thirty private financial technology startups with valuations at or above $1 billion, according to Bloomberg News. A certain percentage of these fintech firms are focused on competing with traditional banks in the lending market. These online lending companies promise a new approach to consumer finance, one that leverages ever-evolving technological advances to more conveniently serve their customer base.

Fintech’s talk of disruption in the banking world has certainly encouraged investments. In 2015 alone, more than $3 billion in capital went to lending startups. However, these hefty investments have not always yielded profitable results. A prime example is LendingClub, which also happens to also be one of the most prominent online lenders. LendingClub originates credit card refinancing and other loans which are then sold to investors, and once had a market value of $10 billion. However, LendingClub has reported losses for the majority of its twelve year history, and its shares are down 77% from their IPO price.

LendingClub’s troubles range from lack of profitability to poor loan performance and legal troubles. On April 25, 2018, the Federal Trade Commission (“FTC”) accused LendingClub of deceiving borrowers about fees and removing money from their bank accounts without authorization. Specifically, the FTC alleges that LendingClub often charges borrowers more than $1,000 in origination fees, despite advertising that its loans carry no hidden fees, and of automatically withdrawing monthly loan payments from borrowers’ bank accounts even after their loan was paid off. The FTC action isn’t the first legal hurdle faced by LendingClub. Earlier this year, the company settled a $125 million shareholder lawsuit stemming from the ouster of CEO Renaud Laplanche.

LendingClub isn’t the only fintech firm that has struggled to deliver on its promises to investors. For example, LendUp has also paid fines and refunds for illegal fees and poor customer practices. The trouble seems to be that as these companies attempt to scale up, they struggle with aspects of the industry that banks have already mastered, such as complying with and navigating the complex landscape of financial regulations, the repercussions of prioritizing customer convenience over risk management, and difficulties in obtaining customers (who tend to be more risk-averse when it comes to financial products, as opposed to other technology-driven markets, such as social media or ride sharing).

However, a new wave of fintech firms appear to be redefining and reviving the online lending space. Perhaps the most prominent of these companies is GreenSky Inc. (“GreenSky”), which facilitates loans for home improvement projects through a smartphone app. Greensky had a tremendously successful IPO in late May of this year, reaping $874 million through sales of 38 million shares (which was higher than its original expectation to sell 34 million shares).

What makes GreenSky unique in this space is that it partners with other companies to both find customers and fund its loans. GreenSky operates a lending platform that enables retailers, health-care providers and home contractors to offer loans to their customers. For example, Home Depot customers have the option of financing their renovation projects using a GreenSky loan. Unlike LendingClub, it does not make loans directly. A network of partner banks, including Fifth Third Bancorp., SunTrust Banks, Inc. and Regions Financial Corporation, fund the loans and hold them on their balance sheets. Perhaps due in part to these strong partnerships, GreenSky also differs from LendingClub in that it has a record of profitability (its net income rose 11% in 2017 to $139 million).

Another fintech firm, PeerStreet, a startup that operates a marketplace for “fix and flip” real estate loans, raised $29.5 million in Series B financing in April of this year. PeerStreet vets loans from lenders that back real-estate investors or entrepreneurs rehabbing single-family houses for resale or rental income. PeerStreet characterizes itself as “a platform for lenders who make loans to sell their loans to a secondary market so they can get liquidity to make more loans.”

The recent success of GreenSky and PeerStreet demonstrate the new reality of online lending: fintech’s long-term success may depend on developing partnerships with the very industry it has set out to disrupt. Fintech’s expansion does not need to come at the expense of traditional banks, and by learning from and working with each other, both online and traditional lenders can help spur the evolution of the finance marketplace.